Understanding Tax Brackets

By: Katie Malan

How do Tax Brackets Work?

Tax brackets are hugely misunderstood. Most people don’t have a full understanding of how tax brackets work. Today, we’re going to map out tax brackets and give you some examples to help you understand them.

First, what is a tax bracket? The brackets are simply that. They are a bracket of income, and each bracket gets charged a different rate. You do not get taxed all at once. It’s tiered.

When do the brackets kick in? Not until after your tax deductions. Whether you’ve itemized using your home interest and charitable contributions, medical expenses, property taxes, or whether you’re using the standard deduction, you are going to be taxed after those kick in.

First, we put in your 1040, your W2s, your 1099, your interest, all of the income that you’ve had throughout the year. Then we subtract out your deductions. If you’re doing a standard deduction, married filing jointly for 2025, it’s going to be $30,000. Once that happens, then we start in on our tax brackets.

Each tax bracket has different settings based on your filing status. If you’re single, you have a different range than if you’re married, filing jointly or if you’re a head of household.

The following are your tax brackets for 2025:

·         $0 to $23,850 is taxed at 10%

·         $23,851to $96,950 is taxed at 12%

·         $69,951 to $206,700 is taxes at 22%

·         It goes on and on. The highest tax bracket is taxed at 36%, but that is 7 brackets up from where the average person starts to be taxed.

Think of tax brackets like a layered cake. If you’re married, filing jointly:

·         The first $23,850 you make, you’re only being taxed at 10%.

·         On that next layer of cake, your 12% bracket, you’re only being charged on slices of cake 23,851 to $96,950.

·         Then that third layer of your cake, anything on that upper layer for most folks, is going to be 22%, and that’s only on the income you made above 96,950 after your standard deduction.

Dispelling a Common Tax Bracket Myth

A common misconception is the higher your tax bracket means the more taxes you’re paying on all your income. That’s just not true! It’s only the dollars in each specific tax bracket that get those tax rates. So, if you’re working overtime or you get a raise, unless your raise goes into the next bracket, you’re only paying taxes on the amount of money that falls into the next bracket.

Here’s a real-life example.

Let’s say that a couple married, filing jointly makes $130,000 after the $30,000 is taken off for their standard deduction. They will have a balance of taxable income of $100,000.

·         They’ll pay $2,385 on the first $23,850 they made that year.

·         Then they’ll pay $8,772 on the next $73,100 They make.

·         Finally, they’ll pay $671 on the $3,050 that folds into that bracket.

That means even though they’re in the 22% tax bracket, their effective tax rate, what they’re paying in tax is 11.8%, by the time you average out what they’ve paid in 10%, 12% and 22%. So, the total tax they’re going to pay all in is $11,828 on that $100,000 income after their standard deduction.

Why Understanding Your Tax Bracket Helps You

Understanding tax brackets helps you plan for life! It allows you to become a little more informed about retirement and investment choices, how those are going to pay out, and how they’re going to impact your taxes.

Let’s say, for example, you’re at a stage in life where you’re taking required minimum distributions (RMDs) from your retirement accounts. You want to draw it down from your retirement so that you’re not having to take so much of the RMDs as you turn 73.

Well, right now you can say, if I’m having X amount of dollars come in from social security and X amount of dollars come from retirement, how much more can I pull out of my retirement before I hit the next tax bracket?

Understanding tax brackets can also help you make better decisions for additional income.

For example, say you’re a schoolteacher and you would like to take a summer job, but you’re worried it will put you into the next tax bracket. Keep in mind, that doesn’t mean that all of your income from the rest of the year is going to be taxed at a higher rate. It’s just whatever additional income that’s above and beyond the bracket.

Hopefully this information will empower you and help you feel less worried about working overtime or taking that extra job, fearing it will nudge you into the next tax bracket.

What to remember?

Layers matter. Only the portions of the income that fall into whatever bracket are going to be taxed at higher rates. You are not being taxed more than once per dollar. Your effective tax rate is always going to be lower than your top.

Tier tax bracket knowledge is power. Hopefully this will help you with plan and have confidence to save money for future use.

If you have questions about tax brackets, call us! We can help you break down the numbers, review the brackets with you and let you know exactly how much you should be paying.